Tax Credits Keep Millions of Working Families From Poverty

ALBUQUERQUE, N.M. — An income tax refund is always welcome, but for nearly 27 million workers who earn barely enough to cover the basic needs of their families, the Earned Income Tax Credit refund is a critical lifeline preventing them from falling into poverty.

Now that lifeline for working families with children is in jeopardy as legislators debate tax increases and spending cuts to close a $1 trillion gap in the federal budget – with some arguing in favor of reducing or even eliminating those tax credits.

The Earned Income Tax Credit for low-income working families has been around since 1975. It was expanded by President Barack Obama in 2009. Now it’s part of the heavily debated tax package set to expire on Dec. 31, but has been widely ignored in discussions that have focused mainly on tax cuts for the wealthy and middle class.

Tax Reform and Working Families

Guided by the belief that no family should live in poverty the Marguerite Casey Foundation released “Skin in the Game,” its most recent report on the federal tax system and tax reform in February.

Marguerite Casey Foundation, which publishes Equal Voice News, provides grants to organizations in some of the poorest states in the country, where families often work two or three low-paying jobs to provide for their children.

To make sure low-income families are not forgotten in the tax debates, the Foundation this year hosted two panel discussions with some of the leading tax policy analysts and researchers in the country. A panel was held in Washington, D.C. in July and the other in New Mexico in October.

Panel on Income Tax Reform and Low Income Families in Albuquerque, N.M.

Here is the full transcript of the panel discussion in New Mexico on October 17

Yet, the stakes are especially high for families who earn tax refunds that sometimes equal several months of paychecks. Just as troubling are the long-term implications for the rest of the country if more families are pushed into poverty.

Eliminating the Earned Income Tax Credit and the Child Tax Credit for millions of working families, would plunge more than 8 million more Americans into poverty – on top of the 46.2 million already living below the poverty line.

The possibility of falling into poverty is always just a paycheck away for Jennifer Salazar, 30, a single mom in Albuquerque, N.M. Salazar earns about $20,000 a year as an assistant cook at a city-run senior center.

Salazar counts on her federal refund, usually between $3,000 and $4,000, to make ends meet and pay off any bills she gets behind on during the year.

Salazar isn’t alone; nearly 26.8 million taxpayers received about $60.7 billion from the tax credits last year, according to the IRS.

Childhood poverty costs the country about $500 billion per year. Cutting the tax refund lifeline to families would easily add at least another $100 billion a year to the cost, estimates Harry Holzer, professor of Public Policy at Georgetown University, who has researched the impacts of the tax credits on low-income families.

This year, Salazar hopes to use the refund to buy a used car to replace the one she has, which is starting to break down. With limited public transportation in Albuquerque, Salazar needs her car to get to work, to take her daughter to school and to get to appointments.

“I try to be both parents,” said Salazar. “Everything I do is because of my daughter. I told her I will do everything I possibly can to make sure she goes to college. If I have to work two jobs, well, I’m not a stranger to that. I will do anything so she doesn’t struggle the way that I do.

“Without the tax refund, we would be back at square one, living with my mom and dad,” said Salazar. “I was only able to get the apartment for us because of my tax refund. I never would have been able to save up for first and last month and the deposit. Now she has her own room and a place to do her homework.”

In fact, studies show that children from low-income working families that receive tax credits that keep them above poverty do better in school and are more likely to go to college.

“That’s what the Earned Income Tax Credit is about ‒ it’s all about taking responsibility,” said Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities. “You don’t get it unless you work. It encourages people to work, and it’s been a tremendous success.”

Ray Schall, pictured with son, Dimitrius, is a student and daycare manager, He said his family counts on their tax refund to make ends meet and cover large expenses that would otherwise put them in debt. Photo courtesy of Ray Schall

Former presidential candidate Mitt Romney sent a shock wave around the country during the 2012 presidential campaign when he announced to a room of supporters that 47 percent of Americans do not pay federal income taxes.

In fact, the people most likely not to pay federal income tax are retirees living on Social Security, students, disabled people – and people like Salazar, who go to work every day. Many have jobs in restaurants, retail, health care, manufacturing or service industries, earning minimum wage.

“What these people have in common is that they work ‒ and they pay a lot of other taxes,” said Marr. “They actually pay payroll taxes at a much higher rate than the people at the top of the pay scale. Low-income people pay a very, very substantial percentage of their income in taxes.”

Besides payroll taxes, low-wage workers, like everyone else, pay taxes on everything from gasoline and new tires to phone service.

Despite that, some argue that federal income taxes should be paid by all, and those who don’t pay into the pot don’t understand, don’t fully feel the cost of government – they don’t have “skin in the game.”

“I’m bothered that we have an increasing number of people who are only paying payroll taxes and not general fund taxes,” said William Beach, director of The Heritage Foundation’s Center for Data Analysis, a conservative think tank.

“As long as we have a system of democratic government, we need to have that population invested in that government, knowing the cost, feeling the cost. And I think the one way you do that is through the tax system.”

Alex Brill, a research fellow at the American Enterprise Institute and former policy director and chief economist of the House Ways and Means Committee, said it isn’t feasible to expect the trillion-dollar gap to be closed by taxing only the rich.

“It’s a mathematical observation – there aren’t sufficient funds at the top of the income spectrum,” said Brill.

However, for many families, the EITC and the Child Tax Credit are exactly what keeps them from needing federal and state safety net programs. For some workers, the refund is equal to earning an additional $3 or $4 an hour on the job.

Ray Schall, 27, an assistant manager at a day care center in Bernalillo, N.M., north of Albuquerque, earns $10.50 an hour and takes home about $20,000 a year. Together, he and his wife make about $35,000. They have four children ranging in age from 2 to 12 years.

Schall, who is also a full-time student studying physics, said the $7,000 tax refund he gets equals four or five months of paychecks. This year, he plans to use the refund to repair the leaky roof on the family’s house.

Without the Earned Income Tax Credit, Schall said he would have to take out a personal loan to fix the roof and risk falling further into debt.

“We look forward to that refund every year,” said Schall. “We pretty much get caught up with our bills and make improvements on our house. Otherwise, we wouldn’t be able to afford anything.”